Thursday, July 16, 2015

Profit sharing takes center stage in American politics

Today's Financial Times highlights leading Democratic presidential candidate Hillary Clinton's advocacy for profit sharing schemes that would contribute to tapering wealth and income inequality.

The FT article cites work done by the Center for American Progress, led by Larry Summers and Ed Balls. CAP is, of course, very close to the Clintons. Its founder, John Podesta, is the Chairman of Mrs. Clinton's presidential campaign, and was formerly President Bill Clinton's Chief of Staff.

Of course, profit sharing has been for long a favorite subject of those writing about "Islamic economics," although the practice of "Islamic finance" has been mainly focused on debt finance, which is not forbidden. Rather than brag about the West discovering the virtues of profit sharing, and labeling the latter "Islamic," one should note that the profit sharing forms discussed in Islamic books of jurisprudence (mainly mudaraba, or silent partnership, and musharaka, or full partnership) predated Islam and were simply adopted within.

In other words, the choice is really not between financial methods that depend for their legitimacy on holy writ and revelation, on the one hand, and some man-made alternatives. All of these financial models are man-made through a trial and error process. We learn from history the effects of various mixes of finance, especially on combinations of economic growth and equity of distribution, and societies may then make their choices. Obviously the American left is getting more interested in issues of income and wealth distribution, and hence refocusing on financial and corporate models that are conducive to less inequitable distribution (although this is no panacea, as I have argued in an earlier posting), including, potentially, hybrid mutual models wherein the workers have partial ownership of enterprises (which, I have argued here and here, is closer to the spirit of classical Islamic jurisprudence than the more recent financial-engineering driven "Islamic finance" that aims to circumvent the spirit of the Law while following its letter, not too well).

Abandoning the brandname "Islamic" and focusing on the prudential regulatory substance of profit sharing rules is best exemplified in the best selling book House of Debt: How They (and You) Caused the Great Recession, and How We Can Prevent It from Happening Again, by two very successful mainstream Finance professors, Atif Mian (at Princeton) and Amir Sufi (at University of Chicago GSB). We know from this review that Larry Summers thought quite highly of Mian and Sufi's argument, which was focused on the housing crisis, in particular, but the principles have been well known for a long time.Let this be a lesson for young scholars who are interested in "Islamic finance." Don't. Focus on being very good at Finance, writ large, like Mian and Sufi did. Then, if you are even half as good as they are, your arguments, which are not hidden behind references to metaphysics and exclusionary scholarship, may convince leaders to make the world a better place.